Economic Reality Prevails: VAT Tribunal Rules on Consideration in Multi-Party Arrangements

Airline Placement Limited (APL) operated a Sponsored Training Programme (STP) for aspiring pilots, requiring them to provide a “security bond” equivalent to training costs. APL arranged training for the aspiring pilots as well as placement with sponsoring airlines. Upon completion and successful hiring of the pilot by sponsoring airline, APL transferred this bond to the sponsoring airline. The sponsoring airline paid APL a placement fee (which was equal to the training cost), and paid the trainee pilot (now trained and an employee ) reduced salary to recover the cost of training i.e. via salary sacrifice.

APL accounted for VAT on placement fees but not on the bonds received from aspiring pilots.

HMRC assessed the bonds as consideration for taxable supplies of training, issuing a VAT assessment. APL argued that the bond was a loan between pilot and airline, and that APL merely facilitated placement. The Tribunal rejected this, finding that APL was the supplier of training and the bond was linked to that supply. The contractual structure did not reflect the economic reality, which was that pilots paid APL for training services, noting that the pilots had no direct contractual relationship with the airline at the time of payment, undermining the loan argument.

Key takeaway

This case reinforces a fundamental VAT principle: labels and mechanics cannot override the economic and commercial reality of a transaction. Businesses should ensure that their commercial arrangements reflect the true nature of the supply and consider how HMRC and the courts may interpret substance over form when assessing VAT liability.

Reference

Airline Placement Limited v The Commissioners for HMRC - Find Case Law - The National Archives